Bloomberg is reporting this weekend that the IMF has indicated that the world's most advanced economies are now in a depression. Now that's ugly!
Here is the story.
Saturday, February 7, 2009
I have been writing about analyst earnings forecasts for some time. Earnings forecasts just keep dropping...
I commented on how bad earnings were last quarter. The web site shows earnings were a negative $3.14 a share, the first time they have ever been negative for a quarter. Ever! That was with 65% of companies reporting. He commented that it was worse than that. They don't have it up yet, but with 78% of companies reporting, losses are now a staggering -$8.56 a share. And it could get worse. The write-offs this quarter are just huge.
So, how does that affect total earnings for 2008? The table above shows analyst projections from March of 2007 through today. Notice how they kept falling over time. They are now down 70% from what was expected two years ago. Earnings for 2008 are a paltry $29.57 and dropping. The S&P 500 closed at 868.60. That makes the P/E (price to earnings) ratio 29.4. (I use a decimal to show I have a sense of humor.)
So, what are they projecting for 2009? Let's take a look. Notice that they too have been falling over time.
If the S&P 500 were to close where it is today, and using the estimates for the first two quarters of 2009, the P/E ratio would be 36.4 on July 1.
But what if earnings merely fall to where they were in the last recession, or about 55-60% of where the projections are today? That would drop the 12-month trailing earnings for the four quarters ending June 30 to $15.90 and result in a nose-bleed P/E of 54.7 by the middle of the year.
If earnings don't come in dramatically better for the first quarter as opposed to last quarter, we could be setting up for a nasty summer bear market. Even in the bear market of 2001-2, the P/E did not get above 47. Which, by the way, at a 47 multiple would correspond to a range for the S&P of either 1111 if the earnings come in as projected or 731 if they come in at the lower range.
I see nothing on the horizon which suggests the economy is going to get manifestly stronger in the next two quarters. The real risk is that earnings come in weak for both quarters and investors simply despair this summer, throwing in the towel and bringing about a vicious bear market. I would seriously consider hedging any long positions you have before earnings season this next April. If they come in stronger, then we will see.
The above is only an excerpt of the entire newsletter. Italics were added by me to emphasize important points. It is all fascinating, and worth reading once each week.
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Friday, February 6, 2009
Treasuries fell for a third straight week after the government’s announcement of a record $67 billion in note and bond sales overshadowed the biggest monthly decline in payrolls since 1974. Yields on the benchmark 10-year note touched the highest in more than two months as the government set the auctions for next week and concern mounted that debt sales will damp demand.
One of the concerns that I have about this is that possibility that the immense supply of treasury debt may cannibalize the corporate and muni bond debt markets, sopping up money that would have gone to those bonds instead. If this happens, interest rates will rise for companies, states, and local governments, making matters even worse for them.
Thursday, February 5, 2009
Bloomberg is reporting the following today:
Ten-year Treasuries rose, snapping a two-day decline, on speculation a government report today will show U.S. job losses are mounting.
The bonds climbed in advance of a report that’s expected to show half a million Americans lost their jobs in January, pushing the number of jobless claims to the highest since records began in 1967.
The report “is going to be ugly, so clearly the market is positioning for that, giving us a firmer Treasury market than in the last day or so,” said Olando Green, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. “Once you get the payrolls out of the way the market will restart focusing on supply, which is a major issue.”
10-year treasury futures overnight have been relatively subdued, but the 30-year futures have shown some modest activity.
Bloomberg has an article this morning about a very sober assessment by John Talbott, a former investment banker for Goldman Sachs.
Here are some excerpts:
Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it.
Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts.
Wednesday, February 4, 2009
As a trader, existing positions can often become a distraction from other emerging trade opportunities elsewhere. It seems that as traders, we often miss good opportunities because we are so absorbed with a different one. This alarm helps me to be mentally alert and to quickly locate new opportunities as they emerge. I have written elsewhere on this blog of the danger of opportunity cost/loss.
Recently, Tradestation updated its software and added some timer alarms, so I no longer need the separate software. I have a timer set in Tradstation that activates an alarm at regular intervals to remind me to quickly scan all my charts. I follow about 20 futures instruments, so even if I have a position in one instrument, I frequently scan all of them so that when a breakout occurs, I can quickly find and assess each one. It is mentally exhausting, but is necessary to keep skin in the game. Who ever said this business was easy?
One person I know who works on the floor of the Chicago bond pits reported to me that many of the hedge funds and large bond mutual funds are liquidating long positions in bonds, and have been since the peak a few weeks ago. Thus, in a downtrend, we should expect that strong heaves of buying may be met with even stronger spasms of selling as those dry heaves run out of steam. Still, I am very aware of the power of the Fed to move markets, so their threat to intervene and buy long-term treasuries is always something I try to keep in mind. One of the rules I live by, as a trader, is this one: "Don't fight the Fed."
Tuesday, February 3, 2009
U.S. soybean, corn and wheat futures rose on Wednesday, as stronger U.S. home sales data buoyed stock markets and firmed crude oil prices.
Russell 2000 -- the leading indicator for stocks, both upside and downside (yesterday's close is the purple line)
S&P 500 -- flat, but about to go negative?
Dow -- still positive
I've also noticed another interesting phenomenon. I've noticed that when I intend to sell, it is most profitable to sell soybean oil. When I wish to buy, on the other hand, it is best to buy soybean meal. Meal tends to move higher, faster than the oil. Oil tends to move lower at a faster pace than the meal. Shown here are the daily charts for both. Also, the chart for soybean meal tends to more closely match that of the chart for the soybean contract.
Soybean Meal -- Moves Higher at a Faster Pace
Soybean Oil -- Moves Lower at a Faster Pace
Monday, February 2, 2009
An excerpt from John Mauldin's most recent newsletter:
Seriously, buy and hold in a secular bear market like we are in is a losing strategy. On an inflation-adjusted basis, you are down if your holding period has been 30 years! Most of us would think that 30 years is the long run! On a nominal basis, you are about where you were ten years ago, if you are in a broad index.
Even if you are a value investor, you have gotten creamed in this market. (Some great value investors are down 60%. Their experience of buying and holding solid companies, which had worked so well for so long, needs to be married with some risk discipline.) You need a sell discipline. Barry's system, or others like it, can at least get you thinking about selling rather than riding a stock all the way to the bottom and hoping it comes back. Hope is not a viable investment strategy...
The best traders and managers have risk controls and sell disciplines and they stick to them. Period. They don't fall in love with a stock or a commodity position.
In his latest newsletter, John mentions and discusses software that combines both fundamental and technical analysis in a single software platform. This is rare in his newsletter. I am not familiar with the sytem, so I neither endorse nor discourage it. However, when John mentions "Barry's system" in the above quote, this trading software/system is what he is referring to. I mention this only as an explanation of the above quote, not as an endorsement. In his complete newsletter, Mauldin has a more complete explanation of how the system works, a special introductory rate for his subscribers, and a link to take advantage of the offer.
Sunday, February 1, 2009
Here is the full story.
Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt.
Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week...
Whether a bad bank would accelerate an end to the financial crisis split delegates attending the Davos talks. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said such an operation would help if “executed well.” Billionaire investor George Soros said in an interview that “it’s not the measure that would turn the situation around and enable banks to lend.”
It should be noted that Dimon's bank would benefit from being able to rid itself of toxic assets by disposing them through the bad bank. I suppose, then, that so would Dimon.